Question of the Day

Have you been impacted by the government shutdown?

It is apparent from the last two election cycles that conservatives need to refresh their political appeal and develop innovative policy proposals aimed at solving real-world problems. We know the proportion of Americans 65 and older will expand dramatically - from about 12 percent in 2000 to almost 20 percent by 2030. One way to address this issue and promote retirement security is for policymakers to eliminate counterproductive provisions in Social Security and Medicare that discourage seniors from staying in the active workforce beyond age 65. Here’s some background.

Between 2007 and 2030, the total population age 65 and older in the United States will increase from about 38 million to about 70 million, according to the latest projections of the Social Security Board of Trustees. One important element of entitlement reform will be to encourage longer working lives. Currently, about 16 percent of persons age 65 and older are in the workforce, up from 11 percent in the early 1990s, but still well below the one-quarter or more of all seniors who worked in the immediate aftermath of World War II. If those reaching age 65 in coming years were to stay in the labor force longer, it would greatly ease the transition to more affordable social insurance spending.

Ironically, some of the largest impediments to continued workforce participation by the elderly are embedded in the main entitlement programs themselves. Of course, one notorious tax on work by seniors has already been repealed. The Social Security earnings test, which reduced benefits by $1 for every $3 in earnings above a threshold for persons age 65 to 69, was targeted for elimination in the 1994 Republican Contract with America.

Other, equally counterproductive provisions, however, still remain in force, as shown in recent research by Gopi Shah Goda, John B. Shoven, and Sita Nataraj Slavov. In a 2006 study, these authors found that Social Security’s tax and benefit rules strongly discourage a long working career. That’s because working beyond 35 years, which many men have done by their mid-50s, only gets counted in the formula if the earnings are higher than an amount credited in a previous year.

What’s more, these older workers still pay the Social Security and Medicare payroll tax. The combined employer-employee tax is 15.3 percent of wages even though many get no additional benefits from either program. This is especially true for the Medicare tax, as workers become entitled to full Medicare hospitalization coverage after only ten years of credited earnings.

In a 2007 study, Goda, Shoven, and Slavov took their analysis one step further by showing Medicare’s current “secondary payer” rules also heavily tax wages. In 1982, to cut federal spending, Congress amended Medicare to require employer-sponsored insurance to cover medical bills first before Medicare would pay for any costs incurred by someone enrolled in both the employer’s plan and Medicare. This provision greatly increased health care costs for employers with seniors on their payroll. The authors hypothesize, rationally, that these higher costs have meant lower wages for those seniors employed by such firms. They estimate that requiring employers to pay first imposes an implicit tax on seniors’ wages ranging from 15 for men at age 65 to 60 percent for women at age 80.

Three reforms suggested by Miss Goda, Mr. Shoven, and Mrs. Slavov would go a long way toward solving the problem. They would exempt any senior who has already worked for 40 years from any further payroll-tax obligations. That would immediately remove a 15.3 percent tax on work for a large number of working seniors. Next, they would reform the Social Security benefit formula to remove the prejudice against longer careers. And, finally, they would repeal the Medicare secondary-payer rule, thus allowing seniors who stay in the workforce to get their full Medicare entitlement at 65 even if their employer provides health insurance.

Most of the costs from these changes would be offset with higher income-tax revenue. Miss Goda, Mr. Shoven, and Mrs. Slavov estimate Medicare spending would increase by approximately $12 billion due to elimination of the secondary-payer rules. However, work effort among the elderly would expand considerably, driving up aggregate wages in the overall economy by a full 1.2 percent. This would generate $59 billion in additional wage income. Assuming a federal marginal tax rate of 25 percent, income taxes would increase by $14.8 billion, enough to fully cover the cost of the Medicare change and a portion of the changes in Social Security.

The combination of increased longevity and early retirement means that people today are spending much more of their lives in retirement than previous generations. Miss Goda, Mr. Shoven, and Mrs. Slavov estimate the average length of retirement is up nearly 50 percent since 1965. This trend toward ever-longer periods of retirement is not sustainable. The United States needs to move toward a more flexible entitlement and labor policy so that workers have will still have security in retirement even as they have strong incentives to improve their income prospects in retirement with continued work.

A crucial first step in this direction must be to cut the implicit taxes on long careers that Social Security and Medicare impose today.

Gary Andres is vice chairman of Dutko Worldwide. James C. Capretta is a fellow at the Ethics and Public Policy Center and a former associate director at the Office of Management and Budget.